Banking on a Strong Q3

The Financial Select Sector ETF (XLF) is up more than 13% this year, leaving investors naturally asking whether or not the rally will continue.

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With third-quarter earnings due out soon from big banks, Barclays’ Jason Goldberg and Brian Morton take a look at the sector, writing that it could be the first time in 15 years that net interest margins expand for four straight quarters.

They write that it won’t be a perfect quarter—they’re surprised that earnings estimates haven’t come down more to account for hurricanes, but admit that loan growth and interest rates have improved.

For the third quarter, Goldberg and Morton expect median EPS to climb about 8% year over year, with revenues up 4.5%, marking the 13 straight quarter of year-over-year revenue growth. He expects on average that banks will post return on assets of more than 1% and returns on equity of 9%.

More detail from the note:

Looking at expected results for 3Q17, generally speaking, at our mid-September Conference, banks talked down near-term loan growth trends (payoffs, paydowns weighed as rates dropped), though net interest income and net interest margins (full impact of mid-June hike coupled with relatively low deposit betas more than offsets flatter yield curve) are still expected to increase. Fee income guidance was mixed (service charges, asset/wealth management, and card fees higher; mortgage stable; trading revenues/IB fees lower, plus hurricane fee waivers), costs should be controlled (most still pointing to annual positive operating leverage), asset quality is benign (though credit card and hurricanes could weigh near-term), and share repurchase continues (CCAR 2017 kicked in). In all this year, coming out of the Conference, we lowered our 3Q17 EPS estimates at 10 banks and raised them only at 1…we also lowered our 3Q17 EPS estimate Ally Financial (ALLY) (-$0.05; hurricanes) and trimmed at Keycorp (KEY) (-$0.01; reduced investment banking fees). We are $0.02 or more above consensus at Huntington Bancshares (HBAN) and State Street (STT) and more than a nickel below the Street at Capital One (COF) and Goldman Sachs (GS).

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Banking on a Strong Q3

The Financial Select Sector ETF (XLF) is up more than 13% this year, leaving investors naturally asking whether or not the rally will continue.

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